Tim is just being coy. AOL isn't negotiating a search deal. It's negotiating a sale.

A source familiar with Tim and AOL's strategic thinking suggests that an outcome of these negotiations could be AOL's sale to Microsoft.

And even if this informed speculation proves false, it's a fact that whoever does sign AOL to a long term search deal will have the inside track to an eventual acquisition.

Good. We've long held that the field of portals will eventually consolidate down from three major players – AOL, MSN, and Yahoo – to two. It's almost happened a couple times.

Readers will shudder to recall that a couple years ago, it looked like the merger would be Yahoo-MSN, but then Yahoo's Jerry Yang asked Microsoft to pay more than $31 per share. Whoops.

Then, in Fall 2008, AOL and Yahoo got close enough to a merger that the heads of each company's media properties spent a weekend together hashing out what properties would go and which would stay after the deal.

Now, the most likely merger will be MSN-AOL.

Our source suggests that Microsoft will want to wait till AOL stops turning in horrible numbers each quarter. But we believe there are, in fact, a couple factors giving the deal momentum already:

Microsoft will pay anything to inch its way up in search market share.

Likewise, Google will do anything to defend a deal from Microsoft.

So what can Microsoft do that Google won't? Offer to buy AOL. Google is run by engineers who sincerely loathe the content-creation business.

Getting AOL's search queries AND defeating Google in big negotiation is easily worth the $2 billion or $3 billion it would take for Microsoft to buy AOL.

Secondarily, merging AOL into MSN (or MSN into AOL) actually makes some sense. AOL and MSN have overlapping sales and engineering teams, so a merger would create all kinds of overlapping costs that could be cut without sacrificing much in the way of production.

Here are two HYPOTHETICAL single-factory companies and their costs per employee. Note that the finance guy at company one has figure out a way to do the job of two people.

Here's how much each employee contributes to revenues. The sales guy at company one can't keep up with his rival.

The total value created by the two companies for their owners is $500,000 per year.

Clearly, that's not enough value. Let's have a merger!

Time to cut overhead. Who should we can?

Time to cut overhead. Who should we can? Let's keep the finance guy at company one, keep company one's lawyer (he's doing the deal) and keep ALL of the content producers. Let's can the inefficient finance people at company two and company one's under-performing sales guy.

We've got a new total value created each year of $800,000!

That's a $300,000 increase for the shareholders of the combined companies. Good merger!